Chapter 6 Questions
Question 3
| Question 3 | ||||||
| a | Initial investment | Per year cost | Period | Opportunity Cost | NPV | EAC |
| $ (12,000.00) | $ (5,000.00) | Infinite | 10% | $ (17,000.00) | $ (1,700.00) | |
| b | Initial investment | Per year cost | Period | Opportunity Cost | NPV | EAC |
| $ (5,000.00) | $ (1,000.00) | 20 years | 10% | ($1,363.64) | $ (136.36) | |
| c | Initial investment | Per year cost | Period | Opportunity Cost | NPV | EAC |
| $ (3,500.00) | $ (1,200.00) | 15 years | 10% | ($4,272.73) | $ (427.27) |
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Question 4
| Question 4 | ||||
| Option A | ||||
| Cost of wooden sliding | $ 5,000.00 | |||
| Maintenance cost | $ 1,000.00 | |||
| Useful life | 10 years | |||
| Annuity factor @ 10% | 6.1442 | |||
| Equivalent Annual Cost | Cost of sliding/ Annuity Factor + Maintainance Cost | |||
| Cost of sliding | Annuity Factor | Maintenance Cost | Ecquivalent Annual Cost | |
| $ 5,000.00 | 6.1442 | $ 1,000.00 | $ 1,813.78 | |
| Option B | ||||
| Cost of Aluminum siding | $ 15,000.00 | |||
| Useful life | Infinity | |||
| Annuity Factor @ 10% | 0 | |||
| Maintenance Cost | x(say) | |||
| Equivalent Annual cost | $ 1,500.00 | |||
| Cost of aluminium siding | Annuity Factor @10% | Maintenance Cost | Ecquivalent Annual Cost | |
| $ 1,500.00 | 0 | x | #DIV/0! | |
| Answer | The maintenance costs should not exceed $1812.776 | |||
Question 6
| Question 6 | ||||||||||||
| a | Investment in the new distribution system | Additional working capital | The initial investment for the project | |||||||||
| $ 10,000,000.00 | $ 1,000,000.00 | $ 11,000,000.00 | ||||||||||
| b | calculation of annual operating cash flow from this project | |||||||||||
| Additional sales | $ 10.00 | |||||||||||
| Less variable cost | $ (4.00) | |||||||||||
| Contribution Margin | $ 6.00 | |||||||||||
| 4 | Less fixed costs | |||||||||||
| less additional advertising | $ (1.00) | |||||||||||
| Depreciation( &10 million /10 years) | $ (1.00) | |||||||||||
| Annual operating income | $ 4.00 | |||||||||||
| Less tax @ 40% | $ 1.60 | |||||||||||
| Net Income | $ 2.40 | |||||||||||
| Add Depreciation | $ 1.00 | |||||||||||
| Annual operating cash flow | $ 3.40 | |||||||||||
| c | NPV of the project in millions | |||||||||||
| Year | $ – | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | |
| Investment in the new distribution system | $ (10.00) | |||||||||||
| Operating cash flow | $ 3.40 | $ 3.40 | $ 3.40 | $ 3.40 | $ 3.40 | $ 3.40 | $ 3.40 | $ 3.40 | $ 3.40 | $ 3.40 | ||
| Additional working capital | $ 1.00 | |||||||||||
| Net Cashflow | #NAME? | $ 3.40 | $ 3.40 | $ 3.40 | $ 3.40 | $ 3.40 | $ 3.40 | $ 3.40 | $ 3.40 | $ 3.40 | $ 3.40 | |
| Discount factor @8% | $ 1.00 | $0.93 | $ 0.86 | $ 0.79 | $ 0.74 | $ 0.68 | $ 0.63 | $ 0.58 | $ 0.54 | $ 0.50 | $ 0.46 | |
| Present value | $ (11.00) | $ 3.16 | $ 2.92 | $ 2.69 | $ 2.52 | $ 2.31 | $ 2.14 | $ 1.97 | $ 1.84 | $ 1.70 | $ 1.56 | |
| NPV – | $ 11.81 | |||||||||||
Other Related Post: Liquidity Ratios
References
Damodaran, A. (2010). Applied corporate finance. John Wiley & Sons.
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Question 
Week 5 Chapter 6 Questions
Select three formula-driven problems from Chapter 6 that you wish to showcase and prepare a Microsoft Excel document showing the Excel formulas used to prepare the solution for those problems.
Chapter 6 Questions
REMINDER: Part of the grade you receive on your problems is the utilization of Formulas. Therefore, do not pick issues that only require a narrative!
Textbook:
Damodaran, A. (2010). Applied corporate finance. John Wiley & Sons.